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ECONOMY  

Review + Something new

Monetary Policy

Fiscal Policy

• Is used to speed up or slow down the economy.

• Is used to speed up or slow down the economy.

• Is conducted by banks (usually a central bank controlled by the

national government).

• Is conducted directly by the national government.

• Banks use tools such as interest rates to influence aggregate

demand, or overall consumption, in the economy.

• Governments use tools such as taxation and spending to influence

aggregate demand, or overall consumption, in the economy.

AGGREGATE DMAND

If people have more money in their

pockets thanks to lower interest rates or lower taxes…

Aggregate means “whole” or “overall.” Demand refers to what people are willing and able to buy.

…It increases aggregate demand,

(or nationwide spending) and

potentially improves the economy.

Expansionary Policy

Contractionary Policy

• Is used to speed up the economy, or increase aggregate

demand.

• Is used to slow down the economy, or decrease aggregate

demand.

• Is used when the economy is in a recession and economic growth

is needed.

• Is used when the economy is experiencing so much growth that

too much inflation is occurring.

OPPOSITION Pretend that the national government wants to speed

the economy by increasing spending. The money needed to do this must be found somewhere, but it can’t be gathered from increasing taxes because that would counteract the benefit of increased spending. Often, governments will resort to borrowing money from other countries or international agencies. This

will increase the national debt.

OPPOSITION Lowering taxes in order to increase consumer

spending is not effective if changes in taxation occur too frequently. People are rational, and will not

increase their spending if they predict that taxes will rise again in the future.

OPPOSITION

Government interference in the economy temporarily creates growth, supports businesses, or lowers

unemployment, but after government spending is taken away, the economy becomes imbalanced. Surpluses and shortages are created, and businesses that should have failed in a free market are artificially thriving despite

low demand. In other words, the government is capable of creating problems in the economy that are even worse than the ones that are naturally created in

the downswings of the business cycle.

OPPOSITION In order to best speed the economy, the government needs to start using monetary and fiscal policy before the economy is in a recession. In order to slow the economy, policies must go into effect before growth becomes too fast. In other words, governments need

to be proactive, not reactive. It is very difficult to predict future economic conditions, so government economic policies are usually not as effective as they

could be.

FRIEDRICH HAYEK • Lived 1899 – 1992

• Austrian economist who challenged the views of Keynes.

• Believed that government interference in the economy

creates imbalances, and that only forces of supply and demand

(the free market) should control the economy.

• After experiencing economic collapse in Austria after WWI due to inflation,

Hayek feared inflation caused by government

policies.

• His book, The Road to Serfdom, is about the dangers of socialism.  

• His school of thought is called “Austrian Economics.”

Keynes vs. Hayek Rap Battle To learn more about their viewpoints, we will watch and

read the lyrics of two songs. As you listen, underline ideas that are familiar to you and circles ones that aren’t.